5th May 2016 10:06
LONDON (Alliance News) - Rolls-Royce Holdings PLC on Thursday said its 2016 results will be significantly weighted to the second half as its markets remain challenging and it barrels ahead with its massive restructuring.
Rolls-Royce was battered in 2015 by a series of profit warnings as it faced pressures in all of its operating divisions.
Having seen its military business come under pressure from squeezed defence budgets globally in recent years, the first negative turn in 2015 emerged in its marine business, which makes propulsion systems for the offshore oil and gas industry and for submarines. In line with other engineers serving the oil and gas industry, orders have slumped amid the collapse in the oil price, as exploration companies slash spending to keep themselves above water.
Then, just as signs of recovery started to emerge in defence budgets, the group's previously robust civil aerospace business started to suffer. The division is taking a hit to volumes and pricing from the transition from its Trent 700 platform to the new Trent 7000 engines, problems which have been compounded by business jet and regional aftermarket sales softness.
In addition, Rolls-Royce is seeing lower utilisation by some carriers of its older wide-body jet engines. Aftermarket revenue and profit are already starting to be dragged down by carriers looking to manage short-term excess capacity, as operators take delivery of new, more fuel-efficient airplanes.
This sparked the start of a massive restructuring programme to reshape the business under Chief Executive Warren East, who joined in mid-2015 having previously been the boss of chipmaker ARM Holdings PLC. East tabled plans to to simplify Rolls-Royce and cuts its fixed cost base.
Rolls-Royce said it will deliver incremental annual cost savings of GBP150.0 million to GBP200.0 million from 2017 as it simplifies its organisation structure, adds pace and accountability to decision-making and seeks to boost gross margins and cash flow.
On Thursday, Rolls-Royce said it was on track to deliver targeted savings of GBP30.0 million to GBP50.0 million a year in 2016, while legacy restructuring efforts in its civil aerospace, defence aerospace and marine businesses are progressing to plan.
But while these attempts to restore the business to health progress, trading conditions for the group are still challenging.
Rolls-Royce said profit for 2016 will be significantly weighted to the second half, with the first half expected to be close to break even, stripping out finance charges and tax. The group said the outlook for the second half is brighter, based on increased large engine deliveries, good underlying growth in aftermarket revenue and anticipated benefits from the restructuring programme.
Free cash flow, however, will be more significantly weighted to the second half than in 2015, reflecting the lower level of profit anticipated for the first half and the strong cash flow performance in late 2015, some of which reversed in January, the group said.
"Despite steady market conditions for most of our businesses, 2016 continue to be a challenging year overall as we sustain investment and transition to major products in Civil Aerospace, and tackle weak markets in Marine," said Chief Executive Warren East.
Shares in Rolls-Royce were down 4.8% to 614.33 pence on Thursday, one of the worst performers in the FTSE 100.
By Sam Unsted; [email protected]; @SamUAtAlliance
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